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When Is a 50% Drop Not Enough?

When it comes to food prices.

As the world debates exactly how bad things can get and how many trillions of dollars governments will need to spend to pull us out of this economic funk, last summer's spike in food prices has probably fallen out of most investors' minds. As a refresher, corn was trading at $7.50 a bushel in early summer, while rice rose above $20 per hundredweight.

That may sound like gobbledygook to those not familiar with commodities markets, but let me assure you, those are historically very high prices. For a proxy, you might look at the stock price of agriculture giants Monsanto(NYSE:MON) and Syngenta(NYSE:SYT) over the past five years.

Since last summer, prices have dropped dramatically, with corn prices now around $3.70 per bushel and rice down to around $12 per hundredweight. However, given the ridiculously high levels seen last year, this means prices for these grains are still well above historic levels. So while most of the developing world is working to prevent asset deflation, the world's poor, who spend significantly more of their income on food, are in a fierce fight against inflation.

You mean something is still up?Prices for basic grains have been rising in recent years for several reasons. Rising incomes have promoted better and more diversified diets. Urban expansion is removing production capacity as farmers move to the city for better jobs and farmland is paved over. Governments, pushing for less dependence on fossil fuels, have promoted ethanol and other biofuels.

According to famous investor Jim Rogers, the world is facing the lowest level of food stores in half a century, and while government support of biofuels isn't a given going forward, the other two drivers aren't likely to change, even with this global slowdown. This is why we see China buying up farmland as far away as Africa, investors like Rogers touting farms in Brazil and Canada as some of the best investments for the next 20 years, and companies like Cresud(NYSE:CRESY) building portfolios of South American farmland.

Government's gentle handInflation is never good, but when it hits the most basic part of people's lives, it is worse. To protect local consumers and their positions of power, governments in many developing nations have been known to throw themselves into the mix, usually with negative results.

In an effort to suppress inflation on food prices, the Chinese government has implemented price caps for basic goods. However, this has deterred farmers from producing grains, and they're switching instead to higher-margin crops like fruits.

Last year's spike in rice prices also led governments to adopt protectionist policies, preventing the export of rice to ensure that prices in local markets remained low. India, the world's No. 3 rice exporter, has had a ban on non-basmati rice exports since last April; and Vietnam, the second-largest exporter in the world, just implemented a four-month ban on rice exports. This just exacerbates the problem by cutting off supplies to global markets, further hurting importers.

And then there's VenezuelaIn a characteristically less subtle approach, Venezuelan President Hugo Chavez recently ordered soldiers to seize control of the country's rice mills because, he said, the operators were holding back production, which was fueling inflation and food shortages. The raids resulted in the nationalization of U.S. food giant Cargill's Venezuelan rice operations.

Of course, the lower production may be a result of Chavez implementing price caps on chicken, rice, and sugar in 2003 (see China discussion above).

Not one to sit still for long, Chavez is now launching attacks on the country's two richest men, one the owner of Grupo Cisneros, a sugar processor, and the other the owner of Polar, a food and drink manufacturer. In another swipe at an American food giant, Chavez also nationalized a piece of land owned by Coca-Cola's (NYSE:KO) Venezuelan distributor. All in all, it has been a busy few weeks for the socialist revolution.

So, what is the solution?With rising demand and shrinking resources for food production, the world faces steadily rising prices for people's most basic needs. The only sustainable way to address the issue is to increase agricultural productivity, especially in developing markets. This requires the introduction of modern agriculture technology and techniques to increase yields (a fact not lost on fertilizer companies like Agrium(NYSE:AGU), which recently made a hostile bid for CF Industries(NYSE:CF) -- which in turn had made a bid of its own for Terra Industries(NYSE:TRA)).

Unfortunately, with the chaos encircling developed markets these days, funding for these types of upgrades isn't likely to be available. This means rising food prices are likely to continue in the coming years, plaguing the world's poorest countries even as they move to join the global economy.

And that, dear Fools, was this week in the emerging markets.

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